PWFL - MiX Telematics Seeks Merger With PowerFleet Amid Challenged Growth

2023-12-26 11:36:06 ET

Summary

• MiX Telematics Limited plans to merge with U.S.-based PowerFleet, which could lead to potential gains and cost-effective pursuit of larger deals.
• The global market for automotive telematics is expected to reach nearly $179.5 billion by 2030, driving growth for companies like MiX Telematics.
• MiX Telematics has shown slow revenue growth and a decline in operating income, but its financial position and free cash flow are stable.
• Until the merger is completed and new management is able to ignite meaningful revenue growth, I'm Neutral [Hold] on MiX Telematics Limited stock.

A Quick Take On MiX Telematics

MiX Telematics Limited ( MIXT ) provides vehicle and other mobile asset tracking and management software and systems globally.

I previously wrote about MIXT with a Hold outlook.

The firm has announced plans to merge with U.S.-based PowerFleet, Inc. ( PWFL ).

Both companies are growing slowly but have potential gains ahead if the merger goes smoothly and the combined company can pursue larger deals more cost-effectively.

However, those processes will take several quarters at least, so I remain Neutral [Hold] on MiX Telematics Limited for now.

MiX Telematics Overview And Market

South Africa-based MiX Telematics was founded in 1996 and provides various fleet and mobile asset tracking and management products and services to companies worldwide.

MIXT is led by founder and CEO Stefan Joselowitz.

The firm’s main offerings include:

• Fleet Manager

• Asset Manager

• Matrix

• Beam-e

• AI Dashcams

• Driver Apps.

The company targets new customers via its direct sales and marketing efforts and through partner referrals.

According to a 2023 market research report by Grand View Research, the worldwide market for automotive telematics was an estimated $49.9 billion in 2022 and is forecast to reach nearly $179.5 billion by 2030.

This represents a forecast CAGR of 16.6% from 2023 to 2030, a strong rate of growth.

The main drivers for this expected growth are a strong demand for increased transportation efficiencies and increasing integration of telematics functions in consumer and commercial vehicles.

Below is a chart showing the historical and future forecasted growth trajectory of the U.S. telematics market:

Major competitive or other industry participants include:

• Verizon Connect

• Karooooo

• Webfleet

• Masternaut

• Fleet Complete

• Tracker

• Netstar

• Ctrack Inseego.

MiX Telematics’ Recent Financial Trends

Total revenue by quarter (blue columns) has grown slowly due in part to foreign exchange headwinds; Operating income by quarter (red line) has turned lower recently.

Gross profit margin by quarter (green line) has fluctuated with no discernible major trend; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have turned lower in recent quarters due to ongoing cost control efforts against growing revenue.

(All data in the above charts is GAAP.)

In the past 12 months, MIXT’s stock price has risen 11.48% vs. that of Karooooo Ltd.’s ( KARO ) gain of 10.14%:

For balance sheet results, the firm ended the quarter with $29.6 million in cash, equivalents and short-term investments and $16.9 million in total debt, all of which was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $16.7 million, during which capital expenditures were $17.1 million. The company paid only $1.0 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For MiX Telematics

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, using a discount rate of 10% (10-year Treasury at 4% plus 6% equity risk premium) and forward earnings per share assumption of $0.41, the firm’s shares would be valued at approximately $7.74 versus the current price of $7.77, indicating they are potentially currently fully valued.

As a reference, a relevant partial public comparable would be Karooooo Ltd.:

(Source - Seeking Alpha.)

MIXT’s most recent unadjusted Rule of 40 calculation was 10.9%, so the firm’s results have deteriorated sequentially, per the table below:

(Source - Seeking Alpha.)

Commentary On MiX Telematics

In its most recent earnings call (Source - Seeking Alpha ), management’s prepared remarks highlighted its recent announcement of a proposed all-stock merger with PowerFleet, a "merger of equals" that will result in MIXT shareholders owning 65.5% of the new group.

PowerFleet’s geographical focus is on the U.S., so it should provide increased opportunities for MiX’s offerings in that important region as well as an increased investor base and greater scale.

The new combined entity will be run by PowerFleet’s CEO and CFO, Steve Towe and David Wilson.

Analysts questioned the leadership about the potential merger and new market segments.

Management stressed the importance of keeping to business as usual despite the possible distractions from the merger deal process.

As to new markets, leadership noted broad demand for its Vision AI camera solutions in all its geographical coverage even though it is still early in its product cycle in having camera solutions in its products.

For the quarter’s results, total revenue rose 7.1% year-over-year, while gross profit fell 1.0% due to accelerated depreciation of in-vehicle devices from an energy sector customer loss.

However, subscription revenue fell by 4.7% due to foreign exchange rate headwinds.

Selling and G&A expenses as a percentage of revenue dropped 3.3% YoY, a positive signal that helped produce operating income growth of 66.7%.

The company's financial position is moderate, with ample liquidity, but all of its debt is short-term. MIXT’s free cash flow is good.

MiX’s Rule of 40 performance has been low and worsening, driven by a substantially lower operating margin.

Looking ahead, the combined entity is expected to produce low revenue growth, with forward growth rates of 2.00% and 4.77% for MIXT and PWFL, respectively.

The combined firm could produce cost synergies and offer up-sell and cross-selling opportunities while giving it more scale to pursue larger deal sizes.

However, these processes take time to effect, and the two entities appear to be fully valued at their current stock price levels.

Therefore, I remain Neutral [Hold] on MIXT in the near term.

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